Inland Revenue releases wide-ranging GST proposals
Inland Revenue releases wide-ranging GST proposals
Inland Revenue officials have released a GST Issues Paper which discusses a broad range of GST issues and potential changes to the GST legislation.
Tax invoice requirements
Inland Revenue has proposed removing some of the existing tax invoice requirements so that the rules are better aligned with modern business practices. Specifically, the quantity or volume of the goods and services supplied will no longer be required.
For recordkeeping purposes, the proposal acknowledges that many tax invoices are now transmitted electronically. The requirement to clearly show "Copy only" on copied tax invoices and for the recipient to "hold" a tax invoice are outdated. However, Inland Revenue is seeking feedback on ways to otherwise evidence that the recipient holds the necessary information to support a valid input tax claim.
Special tax invoices that used to require upfront Inland Revenue approval (e.g. buyer-created tax invoice and shared invoice) will no longer require approvals. However, existing requirements on having the necessary agreements between the relevant parties will remain.
Inland Revenue is seeking feedback on two main approaches to GST on crypto-assets:
- Categorise crypto-assets by their features and fit each respective category into an existing area of law (e.g. shares or currencies);
- As broad as possible a definition and exclude from the scope of GST and the financial arrangement rules.
The proposal focuses on the issuance of crypto-assets, and not crypto-assets related services (e.g. mining, dealing or exchange) with for the objective of neutrality and to minimise distortion.
Categories of crypto-assets should be adopted across all Revenue Acts for consistency and revenue neutrality between different tax types. Investments in an equity-like crypto-asset should ideally have the same tax profile and after-tax return on investment as if it was made in a conventional equity instrument. However, there are concerns with boundaries between categories and the ability for existing tax rules to adequately accommodate innovative crypto-assets with differing features. For example, categorising a crypto-asset as a financial arrangement may result in tax being applied on an unrealised basis. Given that the value of crypto-assets can be highly volatile, this could distort investment activities.
A complete exclusion by deeming crypto-assets as currencies achieves simplicity for compliance purposes. This comes at the cost of the ability to claim input tax credits in cases that would otherwise be taxable supplies. Inland Revenue proposes to allow input tax credits on costs related to issuing crypto-assets for capital raising purposes. This is to align the GST treatment to the 2017 amendment whereby a taxable business is allowed input tax credits claims on costs to raise capital by issuing equity or debt instruments.
The application date for broad amendment is proposed to be 1 January 2009, being the date when the first crypto-asset, bitcoin, was launched, with input tax claims being allowed for capital raising crypto-assets from 1 April 2017 (aligning with the capital raising amendment).
Apportionment and adjustments
GST registered persons must determine the extent to which goods and services are used to make taxable or non-taxable supplies when they are acquired. GST input tax can only be claimed for the percentage of taxable supply use. Subsequent (normally annual) adjustments are required if the initial taxable percentage use changes.
The current apportionment and adjustment rules are complex, time-consuming to comply with, and are not well understood by IRD personnel or taxpayers. The Issues Paper proposes changes to clarify, simplify and amend the legislation. These proposals will be of particular interest to:
- Businesses that currently make GST adjustments;
- Property developers who may be developing land for sale but temporarily using the land for residential rental purposes;
- Residential property owners that use some or all of their property for short-term accommodation.
This is the latest in a long line of changes to these rules. They illustrate how hard it is to get the policy right. We encourage detailed consideration of the practicality of the proposals by GST registered persons. This is an opportunity to establish a sounder basis for apportioning GST.
Domestic leg of the international transportation of goods
New Zealand resident suppliers of domestic transportation services will be able to zero-rate their services when they supply their services to a non-resident transport supplier who transports goods from a place outside New Zealand to a place inside New Zealand (or vice versa).
We welcome this change as it will mean the legislation will reflect the appropriate policy position. It is one that has already been taken by many in the transportation industry and is consistent with other countries’ GST regimes.
Officials are considering whether zero-rating should also apply to the New Zealand domestic leg of international transportation regardless of the residency of the primary transport provider. New Zealand resident suppliers of New Zealand domestic transportation services would not need to determine the residency of the international transport provider.
Officials are also considering whether they need to introduce a prescriptive definition of when domestic transport services have been supplied as part of the international transport of goods.
Business conferences and staff training
Currently providers of conference or staff training services that are physically performed inside New Zealand must charge GST at 15% even if the services are provided to non-residents. Non-resident businesses, that are not carrying on business in New Zealand, can recover any GST charged on such costs. However, the process to obtain GST refunds is cumbersome. The benefits of obtaining GST refunds can be outweighed by the time and cost involved.
The proposal is that business conference and staff training services provided inside New Zealand to non-resident businesses will be able to be zero-rated. This will mean that the non-resident will no longer incur any GST in New Zealand on these costs. However, accommodation, food, or entertainment that may be provided as part of the conference or staff training is not covered. This may limit the benefit of the proposals as non-resident business will still be incurring a GST cost.
The New Zealand provider will need to identify that the customer is a non-resident business that would otherwise be entitled to a GST refund under the current GST refund mechanism before zero-rating the services. This may be a focus of Inland Revenue enforcement activity so the paper trail will not need to be robust.
Insurance pay-outs to third parties
There is a GST revenue loss where a third party receives an insurance pay-out but is not aware that the payment they received was from an insurer. This is common in settlement scenarios where the settlement payment to the recipient is funded by the payer’s insurance, and the insurer makes the settlement payment direct to the recipient (as opposed to the insured party). In this case, the third-party recipient would incorrectly treat the settlement payment as not subject to GST. As the insurer can deduct an amount for GST, the GST input tax is not matched by GST output tax returned by the recipient.
IRD proposes three options to address this issue:
- Making the insurer responsible for the GST obligations in relation to insurance pay-outs, i.e. in essence, insurers will not be able to claim a GST input tax credit on insurance pay-outs to GST registered recipients (where the insurance payment relates to a business-related loss); or
- Requiring insurers to disclose to the recipient that the payment they make to third-parties is an insurance pay-out; or
- No law change, but IRD to provide more education and guidance on the rules on insurance pay-outs.
The proposals will clarify the GST position for third-party recipients of settlement payments and should promote fairer commercial outcomes. The proposal should prevent third party recipients of settlement payments being ‘out-pf-pocket’ due to an unexpected GST liability which they have not considered in their settlement discussions.
However, the proposals will impose additional costs regardless of which of the proposed options is adopted, i.e. either for insurers in updating their systems, processes, etc. or to IRD in educating the relevant parties of the issue. This should not be a barrier in proceeding with the proposals, but further work to minimise the additional compliance burden on affected parties will be required.
Compulsory zero-rating (CZR) of land
Several amendments are proposed to the CZR rules where the current provisions produce flawed outcomes, including amendments to:
- The provisions requiring the purchaser to return GST on the purchase of land, where the vendor has incorrectly treated the sale of the land as zero-rated;
- The timing of the adjustment to be made when a second-hand goods credit is incorrectly claimed on the purchase of land that should have been zero-rated;
- Clarify the timing of when the output tax adjustment is required to be made for zero-rated land that is used for both taxable and non-taxable use.
Most of the proposed amendments are taxpayer friendly and gives a fairer GST outcome.
Of particular concern however, is the proposed amendment to always require the purchaser to return the GST output tax on the sale of land that was incorrectly zero-rated by the vendor, regardless of whether or not the purchaser provided the all the relevant information to the vendor to determine the correct GST treatment of the sale. This has the potential to be exploited by vendors who will have an incentive to always zero-rate the land sales, and shift the liability to pay the output tax on the sale to the purchaser.
The GST treatment of a manager’s fees charged to unit trusts has been the subject of on-going debate and discussion. Their GST treatment is important because it impacts the structure of the funds and of the fund manager as GST is a cost for the provision of financial services. The current industry and Inland Revenue agreement of treating 10% of the fee as taxable manages this cost for investors and fund managers.
Inland Revenue’s concern is that this agreement may not be consistent with GST law or the policy objectives underlying exemption of financial services. The discussion document invites comment on three options. Manager fees are to be:
- Fully exempt;
- Fully taxable; or
- A legislated apportionment.
Further, the proposal would limit the proposed treatment to manager services. Other (administrative) services will continue to be taxable. The proposed border between manager and other services may have a practical impact on management agreements between fund managers and funds.
The options and proposed definitions will each have advantages and disadvantages. No option will solve the GST cost for all investors and fund managers.
Careful consideration of the outcomes and potential changes in structure and agreements is required to test the proposals
Technical and remedial issues
The Issues Paper also includes proposals on the following technical and remedial issues:
- With respect to the GST grouping rules, the Issues Paper proposes to include provisions in the GST Act to:
- Clarify that the grouping rules will be applied before any other provision in the GST Act; and
- Allow the representative member of a GST group to issue tax invoices on behalf of all group members.
- To clarify that input tax credits can be claimed for goods not yet physically received at the time a GST return is filed, but are expected to be used to make taxable supplies.
- Amend the second-hand goods credit provision to allow a credit to be claimed for a supply from an associated person even where the supplier has not paid GST on the original supply.
- Remove the restrictions on what alternative taxable period end dates can be approved by the Commissioner
- Widen the taxable activity exemptions to clarify that the exemptions apply to members of non-statutory bodies
- ·Align the challenge rights for taxpayers when the Commissioner re-opens time-barred GST returns to the challenge right that apply to time-barred income tax assessments.
We welcome the above proposals as they will align the relevant provisions to their intended policy outcomes and/or provide compliance savings to taxpayers.
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